Ask Away Blog: How To Get Out of Debt (From Someone Who Has Done It)

Wednesday, September 26, 2018

How To Get Out of Debt (From Someone Who Has Done It)

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How to get out of debt from someone who has done it




 
Wouldn't it be amazing if you could go through your day to day life without the nagging feeling that you are in some obnoxious debt and always living paycheck to paycheck? Well...you can.  

Being in debt is the worst feeling ever, at least for me it was. You will be sitting at home enjoying your dinner and then BAM, that nagging feeling of owing money to someone else and feeling like you'll never get away from it HITS YOU!  Being in debt is unfortunately a very common thing and it definitely hinders you ability to enjoy life and get in great financial shape.  So I'm here to tell you that it's possible and not all that hard to get out of debt.  I should know since I got myself out of $25,000 worth of debt in a matter of about 3 years.  

Debt can be many things.  It can be money borrowed from a friend or family member, credit card debt, student loans, a car loan, and even medical bills.  If you're trying to do certain things in life like buy a house or car, debt can hinder you because of how it affects your credit score.  But, the good news is that actively paying off debt can help your credit score and help your sanity.  

When I was in my early twenties I had so much debt.  I owed a few grand on my car but mostly it was a decades worth of credit card purchases. I spent money I didn't have impulsively and I also used it as a form of therapy.  If I had a bad day, I charged new clothes, a new computer, or home decor items on my credit card. I knew I had to get my stuff together and if you're reading this post, you've come to that point to whether you normally read this blog or you've searched on the Internet for how to get out of debt and it brought you to this post.

It may seem impossible to get out of the debt you're in but I can tell you it only takes TWO things.  That's right, how to get out of debt is a process of 2 things that anyone can do with the right tools.  The first is knowledge.  You need to understand the process of getting your finances in order and guess what!? I can help you do that!!!  I will explain to you how to manage your money and walk you through everything.  The second thing is patience.  I know you're probably rolling your eyes because no one likes waiting but you will still be making progress and seeing your debt reduced as you bide your time.  I promise you if you just stick with it, you will not regret the payoff. See what I did there?

Some things that may be very helpful before we start...
I wrote a book called Fixing Your Finances and while I offer free advice in this post, my book does an amazing job of really digging in and walking you through it. I promise you will not regret the purchase. My book covers getting out of debt, managing your money with a budget and organized spending system, and building up a savings fund.  It always talks about how to make smart finance decisions in the future.  You can buy my book, Fixing Your Finances on Lulu for a discount of 20% for a limited time, on Amazon, or purchase the PDF version for just $8.99. 

I also have 2 items that you can purchase for a very small price and use as your templates for tracking the debt you paydown and a workable budget spreadsheet template.  You can buy them together in a bundle for a discount as well.

One last thing before I start, because I know you're probably thinking that you need debt to have a good credit score.  That may be true, but don't believe the common misconception that if you don't have debt your credit score will  be low.  I have no debt but my credit score is 832 the last time I checked.  It tells me that my score is being affected by not using credit but guess what? I'm using credit. I have a mortgage and I have a credit card that gives me cash back rewards when I use it so I use it for my regular expenses that I budget for like my groceries.  As soon as I get home from the store, I pay the charge off.  

Whether you are in $5,000 worth of debt or $100,000 worth of debt, if you follow these guides below, you can become debt free and live a great life.  

||STEP ONE|| Evaluate Your Spending
I know I know, this sucks.  You have to take a long hard look at where your money is going though or else you won't be able to budget for it.  So gather all of your receipts and bank statements (including your credit card statements) from the past 3-6 months and grab a couple different colored pens or highlighters.  Take each expense and designate a category for it.  

Category Examples:
Utilities/Bills (phone, mortgage, rent, electric)

Fun (bars, entertainment)
Restaurant (dining out, obviously)
Medical (Co-pays if you have insurance, prescriptions)
Clothing 
Pets (vet bills, food, etc.)
Groceries
Car (maintenance costs that you pay regularly or yearly)
Home (renovations, decor)
Miscellaneous

Add up the amount for each category.  It doesn't matter if some of those purchases were unnecessary, you just need to see the amount you spent. 


Free printable expense worksheet for budgeting

Get my FREE printable expense worksheet!

This is super important to do because this is how you know the amount to set aside each month or each paycheck for all of the different categories of your budget. 

||STEP TWO|| Create A Budget
In order to get out of debt you need to get on and stay on a budget.  Before you start groaning and saying that you don't think you need a budget and that you don't want to deprive yourself, STOP.  The key here is to have every dollar in your bank account designated for something so that you basically have $0 left.  It's helpful to bull some of the money out and place it in cash envelopes for the different categories or even put it in different shares in your bank account if you have that ability.  Being on a budget does NOT mean that you can't spend money. It just means you have to spend money only when you have it. So if you want a $40 lamp and there is only $20 in your home fund, you need to wait till you have $20 more.  I know it doesn't sound fun, but once you get into the habit of it, it becomes second nature and it's the only way to take back control of your money.  I assure you of that! Also, I lived it.  So trust me!

Budget Spreadsheet Template

Create a chart or spreadsheet that shows your net monthly income for your household.  If your income varies, use the lowest amount just to be safe.  My budget is used as a guide and if I make more that month I do what I want with it (usually put it in savings) but you can also choose to update your budget monthly based on income changes.  Then list all of your categories and start subtracting the amount you put in them from your monthly income.   

To determine how much to give to each category take the ones like bills and groceries, take the amount you spend in a month or 6 months and divide it to find out the monthly or biweekly amount.  For things like car costs take what you may spend in a year (think of gas, oil changes, inspection, miscellaneous maintenance estimates) and divide it by 12. 



Just because you're putting money aside in some categories doesn't mean it will be spent each month and when it's not it's considered a mini-savings fund for that category.  I can have several hundred in my car fund by the time I actually need it for new tires. 


Your budget isn't done yet.  We will come back to it a few steps down. 


Whenever it's payday, move or withdraw those amounts and put them in a spending system or another share in your account so you don't end up using them frivolously.  At the end of each month if you haven't spent all of your fun money, maybe you will want to move it over to the decor category to get that lamp.  For utilities that come out on a certain day each month you can leave that money in there but make sure you know it's already accounted for so don't touch it!



Filofax Temperly Cash Envelope System


||STEP THREE|| Create a Realistic Spending System
This is my favorite step because I got to be really creative with it.  You can use accounts for some categories and actual paper envelopes for others.  Or you can get creative like I did with my cash envelope spending system and use plastic envelopes found on amazon and put them in a little organizer.


Filofax Temperly cash envelope system



You can find a Filofax Temperly here or other Filofax's that zip up here. There are other similar options here and here.

You can find cheaper small expanding organizers here and here.   

You can find zip envelopes here, here, and here
It's really fun to use this because it allows me to physically control everything as well.   I don't have a cash envelope for every category since I don't pay cash for everything.  Some things I purchase online so in that case I would just pull it from that share.  If you have any questions about this, just ask in the comments but feel free to tweak the system to meet your needs. 

||STEP FOUR|| Create An Emergency Savings Fund
Before you can even start looking at your debt and paying it off, you need to have an emergency savings fund so that you have money for emergencies you used to use a credit card for.  I barely ever use my emergency fund because I have so many mini savings funds for each category but if I didn't have enough in my car fund for a car emergency, I could use my general emergency fund to make up the difference.  

Do whatever you have to (short of robbing a bank) to fund this savings because once it's done you can work on your debt.  If you have to take on a side gig for a couple of months like driving Uber (which I've done), or selling things online which I've also done.  Trust me, your closet and your house in general probably has a slew of stuff that could help you fill that emergency fund.  I shoot for $500-$1,000 in my emergency fund at all times.   My general savings fund is different.  The emergency fund is only for emergencies.  The general savings would be for long term emergencies.  If your life depended on funding it, you'd do whatever you had to, right? So keep that as your mindset. 

||Step 5|| Evaluate Your Debt
Now this is the scary part but you HAVE TO DO IT!  Write down each debt you have with the current amount.  Then put them in order from smallest to largest, regardless of interest.  This is where using my debt payment tracker comes in handy. You want to pay off the smallest first because the little victories keep you motivated.  Next to each debt, make note of the minimum payment.  Now you have to go back to your budget and add DEBT as a category.  Add up the minimum payments and use that as your monthly amount.  


When you're done, see if your income minus your expenses is a positive number, a zero, or a negative number.  
If it's positive - congrats! Put the extra amount in the general savings category.  If it's zero - congrats because you have a perfectly zero balanced budget.  If it's negative, you need to look at some of your categories and figure where you can adjust the amounts.  Maybe you can spend $20 less each week at the grocery store.  Tweak whatever you can in each category.  I always take away from my fun and restaurant categories because those aren't necessary for me. If you have an extra amount leftover still, you're in luck because you can use that each month to pay off your smallest debt. 


Debt Pay Down tracker spreadsheet

||STEP SIX|| Paying Off Debt
On the smallest debt you want to pay any extra you can, while still paying the minimum on all the others.  As soon as that's paid off, you roll the minimum amount from that debt into your next debt's minimum payment, as well as any extra each month.  This creates a snowball effect where the debt payment amount gets bigger as you go along.  This is what creates a momentum and let me tell you it feels good AF to roll it along.  

This step goes on as long as it takes until you are debt free.  Now, if you have a mortgage that is considered a debt as well but I always hold off on that.  I won't work on paying my mortgage off early until I have finished everything else and built up my general savings fund, which I'm currently working on now.



Wasn't this post supposed to be about how to pay off debt? Well, yea but really you pay off debt by literally paying it off.  All of the other steps are actually the more important part because you can't pay off debt if you don't have a back up savings, and a well organized budget to curb excessive or mismanaged spending. 

It feels so amazingly good to be out of debt and you will want to scream it from the roof.  I suggest doing something a little more quiet so that cops don't come but that's just me.   So whatever you do, don't give up.  And please, if you have any questions, please email me, leave a comment here, or reach out to me on social media. 


Also, I have a Facebook group based on my book.  It's called Fixing Your Finances and it can help keep you motivated along the way!  If you join today, you'll be just in time for the 7 week challenge which starts on October 1st! 

Are you a little bit in debt or a lot in debt?  And are you doing something about it?












3 comments:

  1. Evaluating your spending is actually so helpful, sometimes you don't even know where your money goes until you look at those credit card statements haha :)

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    1. I know!! People are in denial without even meaning to be. I actually have a Facebook Group called Fixing Your Finances and we have a 7 week challenge starting October 1st and the first week is dedicated to evaluating expenses because it's THAT important! Thanks for stopping by!

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  2. We keep an excel sheet with all are spending. Broken down in category. To keep us on track.

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